Over the past few decades, fluctuations in consumer prices have become
as American as baseball, apple pieand Coca-Cola. But not so long
ago (1959, to be precise), thirsty citizens nationwide could enjoy a Coke
and a smile for the very same price the soft drink carried at its introduction
in 1886: a nickel.

Its an achievement in price stability that is not likely to be
surpassed in the U.S. (or any other) economy anytime soon, and now its
been documented by an Emory economics professor and doctoral student in
the paper, The Real Thing: Price Rigidity of the Nickel Coke, 18861959.

The study began a few years ago when Daniel Levy, associate professor
of economics and director of graduate studies for the department, took
his children to the World of Coca-Cola museum in downtown Atlanta. There
he learned of a product whose price and quality remained stable throughout
two world wars, the Great Depression, a couple federal lawsuits and numerous
supply hiccups and shortages.

Levy returned to work and recruited the aid of his graduate assistant,
Andrew Young, now a PhD student in economics, and the two began researching
the howand, especially, the whyof the long, happy life of
the nickel Coke.

There were huge volatilities in the economy, Levy said. Youd
expect markets to react, so it was a big puzzle. As economists, we wanted
to explain it.

And they didmostly. The two first demonstrated that the nominal
price rigidity occurred alongside similar stability in product quality.
Indeed, especially in Atlanta, the tales of former Coca-Cola presidents
Asa Candler and Robert Woodruff guarding the secret formula
of Coca-Cola syrup and steadfastly refusing to compromise it with less-expensive
alternatives have become the stuff of legend.

Levy and Young then proved why several accepted theories of price rigidity
were not applicable to Coca-Cola. They finally settled on a combination
of reasons, first and foremost being the relationshipthe implicit
contract, as the authors describe itbetween the Coca-Cola
Company and the American public.

For decades the company centered its advertising on two points: the quality
of the Real Thing (as opposed to a dizzying array of copycat
beverages) and its nickel price. In fact,
the wedding of Coca-Cola marketing materials and the nickel price is what
kept retailers from raising the price on their own; neighborhood soda
shops couldnt very well sell fountain Cokes for a dime when a full-page
ad on the back cover of the new Life in the magazine rack advertised it
for a nickel.

But another reason was technological. By 1950, more than 400,000 coin-operated
vending machines sold bottles of Coca-Cola for a nickel apiece all across
the country, and the vast majority of these machines were unable to accept
multiple coins or make change. As more machines had popped up, retrofitting
them all to take dimes or quarters and make change became increasingly
expensive, which is partly why Coca-Cola resisted the price change, Levy
and Young surmised.

One piece of evidence for this theory is the fact that in the early 1950s,
Woodruff asked his friend Dwight Eisenhower (who just happened to be president
of the United States) to petition the U.S. Treasury to mint a 7.5-cent
coinand Eisenhower complied! The Treasury, however, declined.

We learned a lot about the history of the United Statesthrough
the lens of Coca-Cola, of course, Levy said about the research,
and to be sure, the paper is filled with anecdotes gleaned from internal
Coca-Cola documents that are as rewarding to its readers as the economic
analysis itself.

Levy and Young have presented the paper several times, including once
at a conference of the American Economic Association and again at the
University of Michigan. They are presently making final revisions before
submitting it for publication.

As macroeconomists, the pair now hopes to discover other products that
have demonstrated comparable price rigidity and determine what effect
these products have in aggregate on the U.S. economy.

The theory is that economies become more stable as governments
become more skilled at tinkering and making minor adjustments, Levy
said. But its possible that econ-omies become more stable
as prices become more flexible.